Housing: the tortoise or the hare?

November 14, 2004
IN the housing market race, prices have been increasing at the speed of the hare, but as the picture begins to change to that of the slow and steady tortoise, who will ultimately win the race?

IN the housing market race, prices have been increasing at the speed of the hare, but as the picture begins to change to that of the slow and steady tortoise, who will ultimately win the race?

Director of the Rics (Royal Institution of Chartered Surveyors) Wales, Cathy McLean gives her race commentary on the Welsh leg and her predictions for who will be first past the finishing post.

Over the last year or so Welsh housing market surveys outlining the rise in prices have dominated the press, accompanied by predictions for the months ahead. Not happy with positive news, the standard reaction has been; "But when will this housing boom crash and burn?"

The nature of the housing market means that there is constant fluctuation as there are so many different factors involved in the house buying process. This lends itself to numerous theories as to the future of the Welsh housing market with one end of the spectrum predicting this boom as burning out rapidly like the hare, whilst the other end of the spectrum predicts a tortoise-like steady plateau effect. So let's take a look at the two contenders.

The hare

"What goes up must come down" is one prediction for the housing market where it is argued that the race has been run at such a pace that the market will surely burn out. Several factors are cited as examples of why this burn out is going to take place.

Firstly, there is the notion that first time buyers are being priced out of the market, this issue has been recognised by the government and is reflected by the Treasury-commissioned Barker Review into housing supply, which concluded that the main problem is affordability. The paradox that meets the government on this issue is that while exponential house price growth prevents the less affluent from gaining a foot on the housing ladder, it is also the motor for the UK's healthy economic growth.

Secondly, there is evidence that the market is currently overstretched, meaning that when prices begin to level, a sharp reversal in prices will ensue because buyers, sellers and lenders are all aware of the over-valuation.

But what is of critical importance to this argument is the ratio of Welsh house prices to average income, which has long served as a warning indicator of previous housing busts. The cost of an average house is now between five and six times the average income, a ratio that is as high, or even higher, than before the last crash. Overall, household debt is also currently at an all-time high.

The tortoise

But what about the other contender in this race? As Andrew Oswald, professor of economics at Warwick University argued in The Times in early 2003, the majority of statistical information about the housing market is still produced by building societies, which of course have a direct interest in reporting high prices. "It is not good for the public that we are short on independent commentators about the market for homes," he says.

In the last quarterly housing market survey Rics (Royal Institution of Chartered Surveyors) reported that house prices in Wales are still resilient despite the fact that the rest of the UK had experienced a house price freeze for the first time in a year. Chartered surveyors around the UK are sure that the market will not crash and burn but will ultimately plateau and experience a steady and slowing effect on what has been a fast housing boom.

To accompany this foresight those supporting the tortoise use the argument that economically the situation is more supportive towards a slow, stable and steady housing market. For instance, we are currently enjoying a low inflationary climate with the general consensus that although interest rates are set to rise, the peak will be around 5.25 per cent at the end of the year, after which they will level off.

The finishing line

There are other factors to consider with regard to the Welsh housing market which could de-stabilise it. For instance, there is an array of random events that could have a knock-on effect ranging from terrorist attack to oil price rises that could result in a market crash.

Also, aside from the great unknown, the one niggling worry is the buy-to-let market which could bring a crash from the bottom up as unprecedented rises at the lower end of the market are unsustainable. In this sector, driven by amateur investors acting speculatively, serious signs of a slowdown could trigger the selling of buy-to-let properties.

However, if I was a betting woman, my money would be on the tortoise.